An inequality measure for stochastic allocations

Few papers in the literature on inequality measurement deal with uncertainty, particularly when the ranking of cohorts may not be fixed. We present a set of axioms implying such a class of inequality measures under uncertainty that is a one-parameter extension of the generalized Gini mean over the distribution of average allocations. The extension consists of a quadratic term accounting for inter-personal correlations. In particular, our measure can simultaneously accommodate a preference for “shared destiny”, a preference for probabilistic mixtures over unfair allocations, and a preference for fairness “for sure” over fairness in expectation.     

Asset pricing with unforeseen contingencies

We investigate an economy of heterogeneous agents that cannot specify all exogenous welfare-relevant events and consequently view the impact of unforeseen contingencies as utility shocks. In this setting we characterize an appropriate market equilibrium concept when securities can trade only on demand- and price-contingent events. We establish the existence of an equilibrium for a class of parametric models in which aggregating taste shocks across agents can lead to nonconsumption pricing factors. To fit the stylized facts, (i) non consumption factors must dominate the pricing kernel and contribute to the variation of the wealth-consumption ratio, (ii) markets must be incomplete and the set of claims that are traded endogenously determined, (iii) agents’ preferences with respect to unforeseen contingencies must be non-expected utility, and, (iv) although non-consumption pricing factors can be conditionally uncorrelated with aggregate consumption shocks, they must be correlated with shocks to expected consumption growth.     

Anchored preference relations

This note explores the implications of a simple and intuitive restriction on reference-dependent preferences assuming the status quo serves as the reference point. The condition imposed potentially rules out situations in which a decision maker has a choice between two prospects, selects one which subsequently becomes the new reference point, and then regrets her initial choice. It is shown that a surprising number of models in a riskless and risky setting violate this behavioral assumption, including Cumulative Prospect Theory as well as any theory exhibiting local non-satiation in which all reference-dependent indifference surfaces are smooth. It is also shown that the condition does admit a class of non-trivial reference-dependent preferences.     

Firm-specific attributes and the cross-section of momentum

This paper identifies observable firm-specific attributes that drive momentum. We find that a firm's revenues, costs, and growth options combine to determine the dynamics of its return autocorrelation. We use these insights to implement momentum strategies (buying winners and selling losers) with both numerically simulated returns and CRSP/Compustat data. In both sets of data, momentum strategies that use firms with high revenue growth volatility, low costs, or valuable growth options outperform traditional momentum strategies by approximately 5% per year.     

Rating the credit rating agencies

We offer herein several policy tools that can assist the new Office of Credit Ratings within the Securities and Exchange Commission in assessing the quality of past credit ratings and thus measuring the inclusive competency of credit rating agencies. We propose to weigh the degrees of accuracy, consistency and total synchronization between a tested sample of past ratings and a benchmark array of flawless ratings. We also discuss various techniques to handle major discrepancies between these two arrays of credit ratings. We further explain and demonstrate the importance of different sample sizes. In addition, we present a simple approach to estimate the probability of convergence between the two matched sets of ratings under specified governing thresholds. Lastly, we illustrate the bulk of the theory with a concise empirical investigation.     

Inter-temporal preference for flexibility and risky choice

We derive an inter-temporal theory of choice, in the spirit of Kreps and Porteus [Kreps, D.M., Porteus, E.L., 1978. Temporal resolution of uncertainty and dynamic choice theory. Econometrica 46, 185–200], where decision makers have incomplete preferences. This can be used to model indecisiveness as well as unforeseen contingencies. The key to our approach is a time consistency condition and therefore the normative connection between ex-ante and ex-post choice. The time consistency condition enables a representation that is a straight forward extension of recursive utility with the exception that it features an inter-temporal ‘utility for flexibility’.     

What is an ‘endogenous state space’?

Summary. In the literature on choice under unforeseen contingencies, the decision maker behaves as if she aggregates possible instances of future rankings indexed by a set S. The set S is interpreted as a subjective state space even though subsequent rankings need not conform to any one of the aggregated utilities. This paper proposes a definition for a subjective state space under unforeseen contingencies that is topologically unique, derives its existence from preference primitives as opposed to the representation of preferences, and does not commit to an interpretation in which states correspond to future realized rankings. The definition topologically concurs with and extends the identification of the essentially unique subjective state space due to Dekel, Lipman and Rustichini [4].Received: 28 October 2003, Revised: 13 October 2004, JEL Classification Numbers: D11, D81, D91.I thank Eddie Dekel, Alan Kraus, Bart Lipman, Chris Shannon, and the referee for some helpful remarks.     

A Liquidity-Based Theory of Closed-End Funds

This paper develops a rational, liquidity-based model of closed-endfunds (CEFs) that provides an economic motivation for the existenceof this organizational form: They offer a means for investorsto buy illiquid securities, without facing the potential costsassociated with direct trading and without the externalitiesimposed by an open-end fund structure. Our theory predicts thepatterns observed in CEF initial public offerings (IPOs) andthe observed behavior of the CEF discount, which results froma trade-off between the liquidity benefits of investing in theCEF and the fees charged by the fund's managers. In particular,the model explains why IPOs occur in waves in certain sectorsat a time, why funds are issued at a premium to net asset value(NAV), and why they later usually trade at a discount. We alsoconduct an empirical investigation, which, overall, providesmore support for a liquidity-based model than for an alternativesentiment-based explanation.